If China's Internet Tightens Up, Who Loses?

Members of its National People's Congress are drafting a bill this week that would require users to report their real names to Internet providers.

A move like this out of the restrictive Chinese government isn't a surprise, and some companies are already doing it.

Leading social networking website operator Renren requires users to register with their real names. Despite the killjoy verification process, Renren has amassed 172 million activated users (though just 48 million -- or 28% of them -- are active monthly users).

The situation gets murkier for SINA's high-flying microblogging website. In theory this shouldn't be an issue for an issue for SINA Weibo or Tencent. Earlier this year China began requiring microblog users to register with their real names in an effort to keep dissidents and foreigners at a safe distance. However, the sites have been understandably slow in taking a hard line on verification.

SINA's Weibo recently surpassed 400 million total registered users, and it wants to make sure that it keeps them.

The restrictive bill also comes at a bad time. SINA, Renren, and even Chinese leading search engine Baidu have all guided investors to expect a rare sequential dip in revenue this quarter. Renren also spooked investors by posting a 14% year-over-year decline in online advertising.

One would think that real names would attract higher-paying advertisers, but what if restrictions catch up to China's Web-savvy youth?

Some of the companies dipping slightly on Monday's news include Baidu, NetEase , and Youku Tudou . The declines may not seem warranted at first. Baidu specializes in simple search, though it also has some skin in social through features including query-based online community PostBar. NetEase is one of China's largest online gaming companies, immersing young players into multiplayer fantasy games. Youku is the country's biggest player in streaming video.

A more restrictive Internet hurts all players. If folks become more cautious about what they share under real names, the incentives to engage diminish.

China's government may want exactly that, but it's certainly not what many Internet users and likely most dot-coms want to see happen.

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